Premature rate rise would ëundermine UKís recovery

Prematurely increasing interest rates during this year would seriously undermine the UKís economic recovery, a prominent member of the Monetary Policy Committee has argued.

Paul Fisher, a key policy director within the Committee has emphatically defended the Bank of Englandís stance on interest rates, arguing that any knee-jerk reaction to the rapid decline in the UKís unemployment rate would be ill advised until living standards improve.

Earlier this week it was announced that the UKís unemployment fell again to 7.1%, after a period of six months which has seen decrease of almost 0.5%.

Last year, Bank governor Mark Carney implemented his forward guidance policy which attached interest rates and their projection to the unemployment rate in country.

The threshold previously identified as the point in which rate rises would be considered was 7%, and with unemployment falling at an exceptional rate, many leading economists have forecasted that the threshold could be breached as early as spring this year.

Falling unemployment rates combined with recent growth forecasts within the UK economy has led to many leading economists across the country to call for a premature rise in interest rates, but the Bank has remained hinged on its stance and has refused to consider a rise until that time that wages improve for workers.

And Mr Fisher has issued his full support for the Bankís actions, arguing that it was pivotal that policy makers stuck to their convictions despite heavy pressure from city and economic officials alike for a rise.

He said: “Even if the 7% unemployment rate threshold were to be reached in the near future, I see no immediate need for a tightening of policy. The MPC has been clear all along, that upon reaching the 7% threshold we will have to consider what the medium-term pressures on the economy are and make an appropriate judgement about the direction and pace of policy, and any further guidance that we may choose to issue in future.”

Mr Fisher added that labour productivity needed to improve via small business lending in order to create real growth in the countryís economy, rather than just improving the numbers of low pay jobs.

He said there was a need for a rise in productivity to generate growth rather than just an expansion of the workforce.

He said: ìProductivity ultimately drives real national income per head and hence how well off we are as a country. So we need to see rising employment accompanied by even faster growth in output.”

The Bank of England has reiterated this sentiment of improving the quality of work rather than the quantity of those in employment, raising concerns about the number of people moving from high income jobs to low pay employment after being sacked.

Howard Archer, chief economist at IHS Global Insight, said: “It is very evident that the MPC is looking to take every opportunity to ram home the message that interest rates are unlikely to rise anytime soon. MPC members are also stressing that when interest rates do eventually start to rise, they will do so only gradually.

“While the Bank of England has always stressed that an unemployment rate of 7.0% is not a trigger for an automatic interest rate hike but a threshold for considering whether interest rates are at an appropriate level given the overall state of the economy, it is now really looking to ram this message home.

“This was evident in the minutes of the January MPC meeting which stated that ‘members saw no immediate need to raise Bank Rate even if the 7.0% threshold were to be breached in the near future’.

“The minutes further commented that it was likely that the headwinds to growth associated with the aftermath of the financial crisis would persist for some time yet and that inflationary pressures would remain contained. Consequently, when the time did come to raise Bank Rate, it would be appropriate to do so only gradually.”